Northern Technologies International Corp (NTIC) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Northern Technologies International Corporation third-quarter 2013 earnings conference call and webcast. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, with instructions to be given at that time. (Operator Instructions).

I would now like to turn the call over to your host for today, Mr. G. Patrick Lynch, President and CEO. Sir, you may begin.

Thank you. Good morning. I am Patrick Lynch, NTIC's Chief Executive Officer; and I am here with Matt Wolsfeld, NTIC's Chief Financial Officer. Please note that our fiscal 2013 third-quarter and year-to-date financial results were included in a press release issued earlier this morning, a copy of which is now available online at NTIC.com.

During this call, we will review various key aspects of our fiscal 2013 third-quarter and year-to-date financial results, provide a brief business update, and then conclude with a short question-and-answer session. As part of our discussion, we will be making certain forward-looking statements regarding NTIC's future financial and operating results, as well as our business plans, objectives, and expectations. Please be advised that these forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, and that NTIC desires to avail itself of the protections of the Safe Harbor for these statements. Please also be advised that actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those described in our most recent annual report on Form 10-K and subsequent quarterly report on Form 10-Q.

We suggest that you read these reports and other future filings that we will make with the SEC. We disclaim any duty to update or revise our forward-looking statements.

NTIC's consolidated net sales decreased 24.7% and 6.8% during the 3 months and 9 months ended May 31, 2013, compared to the 3 and 9 months ended May 31, 2012. These decreases were primarily a result of decreases in sales of ZERUST corrosion inhibiting products and services in Brazil. In the previous fiscal year, Zerust Brazil recorded a $2.3 million order during the 3 months ended May 31, 2012, related to product sales to Petrobras, but by contrast did not have any sales to Petrobras during the 3 months ended May 31, 2013.

As we announced during prior conference calls, during the first quarter of fiscal 2013, Zerust Brazil signed a phase 3 contract with Petrobras to supply $3.7 million in Zerust products. We initially had anticipated that Petrobras would fulfill this phase 3 contract in one large order prior to the end of fiscal 2013. However, as mentioned last quarter, based on our discussions with Petrobras, we believe that Petrobras now intends to place a number of smaller orders during the remainder of fiscal 2013 and fiscal 2014, rather than a single large order as they did during the 3 months ended May 31, 2012.

Despite these changes, NTIC's sales of ZERUST products to our industrial customers in North America were strong, due primarily to cultivating new customers. Recognizing the difficult year-over-year quarterly comparison for third quarter due to the $2.3 million order from Petrobras last fiscal year, we compared our third-quarter net sales for fiscal 2013 to each of the last 3 consecutive quarters and are pleased to report that our $5.9 million in net sales for third quarter has exceeded our consolidated net sales for each of our last three consecutive quarters. We believe this growth is largely attributable to the sales growth of our traditional ZERUST products to new and existing industrial customers in North America.

We are also pleased with the increase in earnings from our joint venture operations during the third quarter, which increased 31% over third quarter of last fiscal year and increased 18% over the first 9 months of the last fiscal year, despite the fact that a number of key European countries continue to struggle towards economic recovery and Asian countries continue to address instability in that region of the world. A portion of these increases were due to the consolidation of NTI ASEAN, which was included in the current fiscal year period but not in the prior fiscal year period.

Overall earnings from our joint venture operations also improved significantly compared to the first and second quarters of fiscal 2013. Total net sales of NTIC's joint ventures were relatively stable, decreasing only slightly during the current fiscal year periods as compared to the respective prior fiscal year periods.

We believe that strong sales growth of industrial ZERUST products outside of North America by our joint ventures will likely continue to be quite difficult to achieve over the next few quarters in light of the anticipated continued economic uncertainties in Europe and Asia. During the first 9 months of fiscal 2013, we earned $0.39 per diluted share, which is a decrease from the $0.68 per diluted share earned during the first 9 months of fiscal 2012.

With respect to our Oil and Gas business, as I've already mentioned, our most recent discussions with Petrobras now lead us to believe that they will spread out the $3.7 million phase 3 contract with smaller monthly or quarterly orders that will continue well into fiscal 2014. At the same time, given our contract negotiations and ongoing joint new product trials, as well as research and development projects, we are confident of the expanded use of ZERUST technologies at Petrobras going forward.

Please remember that, as evidenced during the past two fiscal years, our sales to Petrobras, while contractual, do not occur at regular, predictable intervals. We anticipate that this volatility will continue in future periods as our ZERUST products are utilized by Petrobras.

Our Zerust Oil and Gas team has successfully expanded our portfolio of solutions to include some unique approaches to protecting the bottoms of oil storage tanks from failures due to soil-side corrosion. After many years of trials in R&D, these solutions are finding commercial validation at multiple client sites around the world. The current primary sales focus is on tank farm owners and operators in the US.

As this program gains further traction, sales and income from these solutions are expected to be a significant contributor to our annual results. More details will be made available to investors in the coming quarters as we complete additional implementations.

Now, turning to our Natur-Tec bioplastics business. Sales of our Natur-Tec products increased 9% to $1.5 million during the first 9 months of fiscal 2013 compared to $1.4 million during the first 9 months of fiscal 2012. Natur-Tec represented roughly 9% of NTIC's consolidated net sales during the most recent period. Customer demand has continued to grow as we expand our North American distribution network for finished Natur-Tec bioplastic products.

Our sales of Natur-Tec products were down during the third quarter compared to third quarter of last fiscal year, primarily as a result of fluctuating order patterns by distributors and sales agents and one change in distributor. Because of the typical size of individual orders and overall size of our net sales derived from sales of Natur-Tec products, the timing of one or more orders can significantly affect our quarterly sales of Natur-Tec products and comparisons to prior-year quarters. This is also true with respect to sales of ZERUST products for the oil and gas industry and is the primary reason why we give only annual financial guidance as opposed to quarterly financial guidance, and why we place more weight on our year-to-date financial results rather than our quarterly financial results.

During fiscal 2011, NTIC entered into an agreement with Italy-based Naturfuels. Under the terms of this distribution agreement, NTIC supplies Naturfuels with patented, high-strength Natur-Tec film-grade resin compounds suited to producing compostable shopping and garbage bags on conventional plastic film production equipment.

Full enforcement of Italian legislation banning the use of non-biodegradable plastic shopping bags was scheduled to commence this summer. However, enforcement of this law continues to be delayed for a number of reasons, including a recent legal challenge as to the validity of this ban in a European Union member country by the government of the United Kingdom. Consequently, significant sales of Natur-Tec film-grade resin compounds to Naturfuels in Italy are not expected until whenever the Italian ban is fully implemented and enforced.

As previously announced, in May 2012 Harita NTI began supplying finished Natur-Tec products to an iconic US apparel brand that continues to expand the use of Natur-Tec bags as they source finished products from India and other countries. We are currently working to improve our supply chain for these and other products and expect better margins to have a material impact on the profitability of Natur-Tec, starting in the first quarter of fiscal 2014.

I will now turn the call over to Matt Wolsfeld to summarize in more detail our financial results for the first 9 months of fiscal 2013.

Thanks, Patrick. Net sales of NTIC's ZERUST products decreased 8% to $14.9 million during the first 9 months of fiscal 2013 compared to the first 9 months of fiscal 2012. This sales decrease was primarily a result of decreases in sales of ZERUST corrosion-inhibiting products and services in Brazil. As Patrick mentioned, Zerust Brazil recorded a $2.3 million order during the first 3 months -- or during the 3 months ended May 31, 2012, related to product sales to Petrobras and did not have any sales to Petrobras during the 3 months ended May 31, 2013.

Our overall net sales decrease was partially offset by an increase in demand for our ZERUST products from new and existing customers in North America. However, it is important to note that during our first and second quarters, and to a lesser extent, our third quarter of fiscal 2013, we incurred startup costs as we ramped up production on a range of new ZERUST products for delivery to these new customers.

As a result of these increased production costs as well as the expanded production mix, we experienced a decrease in our cost of goods sold as a percentage of net sales during our current fiscal year period as compared to our prior fiscal year period. This increase in production expenses is anticipated to be temporary and should normalize during the fourth quarter of fiscal 2013.

Income provided by our joint venture operations increased 18% during the first 9 months of fiscal 2013. Although our equity and income with joint ventures decreased 15.3%, our fees for services provided to joint ventures increased 59.2% during the 9 months ended May 31, 2013, compared to the same period in fiscal 2012.

These changes were primarily the result of the consolidation of NTIASEAN, which was included in the current fiscal year period but not in the prior fiscal year period. Our fees for services provided are a function of the net sales of our joint ventures, which were $82.8 million during the 9 months ended May 31, 2013, compared to $83.7 million during the 9 months ended May 31, 2012.

Total net sales of our joint ventures were adversely affected in part by the European economic slowdown, which we believe adversely affected the net sales of our joint ventures in that region, as well as certain of our other non-European joint ventures, and the weakening of the euro and other currencies compared to the US dollar. With respect to our joint venture operations and how they are reflected on our consolidated statement of cash flows, keep in mind that dividends received from our joint ventures are reflected in our cash flows from investing activities, and not our cash flows from operating activities. Accordingly, our cash flows from investing activities are typically positive, while our cash flows from operating activities are typically negative.

For the first 9 months of fiscal 2013, net cash used in operating activities was $3.1 million, whereas the net cash provided by investing activities was $3.3 million, $3 million of which were dividends received from our joint ventures. Accordingly, if dividends received from our joint ventures were reflected in our cash flows from operating activities, for the first 9 months of fiscal 2013 our cash flows used in operating activities would have been much higher.

Our total operating expenses increased $468,000 to $11 million the first 9 months of fiscal 2013, primarily a result of an increase in expenses incurred in support of joint ventures and selling expenses, which we consider critical to pursuing various new business opportunities around the world. Overall, net income attributable to NTIC decreased just over 36% to $927,000 or $0.21 per diluted common share for the 3 months ended May 31, 2013, compared to $1.5 million or $0.33 per diluted common share for the 3 months ended May 31, 2012.

Net income attributable to NTIC decreased 42% to $1.8 million or $0.39 per diluted common share for the 9 months ended May 31, 2013, compared to $3 million, or $0.68 per diluted common share for the 9 months ended May 31, 2012. These decreases were primarily the result of decreases in gross profit, partially offset by increases in fees for services provided to joint ventures.

We anticipate that our quarterly income will remain subject to significant volatility, primarily due to the sales performance of our joint ventures and sales of our ZERUST products and services in the oil and gas industry. Each of these fluctuates more on a quarterly basis than our traditional ZERUST business in North America.

As of May 31, 2013, our working capital was $13.1 million, including $3.2 million in cash and cash equivalents, compared to working capital of $10 million, including $4.1 million in cash and cash equivalents as of August 31, 2012. As of May 31, 2013, we continue to have no borrowings outstanding under our $3 million revolving line of credit.

We continue to expect that our net sales will range between $24 million and $25 million, inclusive of sales made by our majority-owned subsidiary in Brazil, for the fiscal year ended August 31, 2013. However, as a result of life insurance proceeds we have received and expect to receive during fourth quarter of fiscal 2013, we are increasing our earnings guidance by $600,000 or $0.13 per share, and we now expect our net income attributable to NTIC to range between $3.3 million and $3.6 million, or between $0.75 and $0.81 per diluted common share for the fiscal year ending August 31, 2013.

With that financial update, Patrick and I will now answer any questions you may have.

(Operator Instructions). Tim Clarkson, Van Capital Clemens.

Hi, guys. Good quarter. Just wanted to get some additional color on the potential business you are looking to get on this oil and gas tank application, and how significant can these contracts be? Are these potentially large contracts? And how fast do you think they can come online?

I would say that the individual contract size on a per-tank basis is significant, not huge. But given the, A, that this problem is prevalent pretty much universally around the world, and the number of tanks that are available as far as the market potential, the market opportunity promises to be quite significant.

Now, what is the payoff from the end user? I mean, if they've got a tank and you put in your process, let's say that the tank would normally corrode in X amount of years, how many additional years do you get? Or does it eliminate corrosion totally? Or what is the per-dollar payoff by doing this?

Sure. Rather than giving you financials, I'd like to give you a different example. When we were talking a few years ago about doing tank top -- tank roof protection, while that is also a significant problem in the industry, if a tank owner or operator has a hole in the roof, they don't need to immediately shut down the tank from operations. They can continue operations for quite some time before they actually wind up repairing that.

Once you have a leak in the bottom of your tank, however, you have a very significant problem. And they have to shut down operations immediately and repair that leak. That is why so many prospective customers are interested, obviously, in considering this as a solution.

Okay. And how confident are you that this technology really works?

We have seen -- our field trials with various customers have shown significant improvement in the life of their tank bottoms, so they seem to be confident. Everything we have done so far to show that the technology works and works very well, and consequently, we think we have a good solution.

Okay. And how hard is this to implement? Is this a fairly elegant technology, or is it messy technology?

Well, we always like to think that all of our technology is very elegant, but if you are saying is it complex to implement or relatively easy, I would say that we are not worried in terms of our ability to implement this.

Okay. Do you have more than one potential client in the United States that you're working with, or just one at this point?

No, no, no. We have several in the United States we are currently working with.

Okay. Well, thanks. I'm good with that. Thanks.

Thanks.

Brian Yurinich, Craig-Hallum Capital.

Hi, guys. I was just curious. Last quarter I believe you said that you had about 50 customers in the oil and gas business, and you had made small initial sales in the 10 to 15. Of those 50, what percentage would be this oil and gas tank bottom kind of product, and then what would be other products?

And then what percentage of ZERUST -- or what amount came from these small initial sales? Like, how -- are we growing that quarter to quarter?

You are giving me too many questions at once. Let's take those piece by piece.

Okay. First of all, I would say that we are currently talking to -- just on the tank bottoms alone, I think we are currently in various stages with 10 different companies. And of course, they have multiple locations, many of them not just in the United States, but elsewhere in the world as well. So we are looking at it from that perspective.

And with regards to non-tank bottom solutions, we do have sales of Flange Savers now in addition to Brazil, both in India and in Russia, albeit relatively modest, but with significant growth. And we are also expecting to see certain initial sales of Flange Savers in Asia before fiscal year end, potentially. Does that answer your question, or can I add anything to that?

No, that's great. But how -- can you quantify what these initial sales would be? And have we added -- I guess that, and then have we added to the 50 customers you had last quarter?

Brian, for third quarter, the tank bottom solutions that Patrick was talking about, there are no revenues included in third quarter that relate to -- no significant revenues that relate to tank bottom solutions. The 10 customers that Patrick is referring to that we are in various stages and looking to implement, some hopefully before the end of the fiscal year, some shortly after the start of next fiscal year, that would be included more in fourth quarter and first quarter.

Okay. And then, I guess, how long does it take to implement your solution onto a tank? If someone bought it, how long does it take them to actually install it?

Our piece of it, a few days. We're talking, like, less than a week.

Okay. That's all I have.

Thanks.

(Operator Instructions). Charlie Pine, Van Clemens and Company.

Good morning, fellas.

Good morning.

Sort of a follow-up question along similar lines in the oil and gas area, and then I will have one other one. How would you scope out the potential market size right now on the Flange Saver market and the size of that addressable market versus what you see as the opportunity for the business in the tank bottom application? Can you put any numbers on that?

I am not quite sure we want to put any numbers out there at this moment.

Well, what about just in relative size, then? Is the --

I mean, put it this way. We certainly see that the market potential for the Flange Savers and the tank bottoms are at least as significant -- one is as significant as the other.

All right. Which of the two are you more -- have you decided to be more aggressive with, currently?

I think that depends on a country-by-country basis. While the Flange Savers are being more aggressively pursued outside the United States at this point, the tank bottoms are being more aggressively pursued right now within the United States, partially because of market access.

Okay. And, finally, I would like to ask about the Italian bag ban.

Sure.

You said that that's been -- the enforcement on that now has been delayed for quite some time. Do you have any feel for when all of this might be settled, or is this something that you are anticipating could possibly drag on now for potentially a couple years?

Good question. I would put it this way. Based on both the past delays and current delays, we are basically adjusting all of our plans for Natur-Tec to assume that Italy will not happen for the foreseeable future. So everything we are doing is basically saying, if Italy comes, it is an upside, but it is not factoring into our decision-making process as to what we are doing with Natur-Tec otherwise.

Are you shipping any more resins to them, or has that stopped?

Right now, we have no orders from Naturfuels. So, like I said, our orders to Italy at this point -- we are not anticipating any significant business. We have some orders to other countries in Europe which are still small, but potentially will grow to a good size. But nothing on the horizon in Europe as big as what we had anticipated in Italy.

Right. And the last one on that -- along those lines. That iconic American apparel brand that you've been supplying, are they expanding their usage of Natur-Tec products?

Yes, they are. And as I mentioned earlier on the call, we are also working to improve our supply chain, which we hope that as those volumes to the apparel company increase, our margins should also improve.

Okay. Great, Patrick. Thank you very much.

Yes.

Thank you. And I am showing no additional questions in queue. I would like to turn the conference back over to management for any closing remarks.

I'd like to thank everyone for participating today. Thank you for listening and your interest in NTIC. Have a nice day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of the day.